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Oil Weekly Outlook For March 18-22

March 17, 2013

During the previous week, oil price (WTI) continued to rise while Brent oil slightly declined: WTI rose by 1.63%; Brent oil declined by 1.33%. As a result, the gap between the Brent oil and WTI contracted again to its lowest level since July 2012; the difference between Brent and WTI ranged between $15 and $18. Based on the recent EIA report, oil stockpiles fell again by 5.6 MB. Will oil continue to rise next week? During next week, several publications may affect the oil market. These items include: FOMC meeting, Philly fed index, China’s manufacturing PMI and EIA oil weekly report.

Here is a weekly outlook and analysis for the crude oil market for March 18th to March 22nd:

Oil Prices – March

During the previous week, crude oil price (WTI) increased again by 1.63% and reached by Friday $93.45/b; alternatively, Brent oil decreased by 1.33% to $109.44/b; during the month, WTI oil rose by 1.52%; Brent oil slipped by 1.8%.

In the chart below are the shifts in WTI and Brent oil prices during February-March (rates are normalized to January 31st). As seen below, the rates of oil have had a moderate an unclear trend in recent days.

Premium of Brent over WTI – March

The difference between Brent oil and WTI spot oil has contracted again during last week as it ranged between $15 and $18 per barrel. During the month, the premium plummeted by 17.6%.

Oil Stockpiles – Fell again by 5.6 Mb

The oil stockpiles declined again by 5.6 MB and reached 1,776.7 million barrels. The linear correlation between the shifts in stockpiles remained mid-strong and negative: this correlation suggests that the price of oil, assuming all things equal, will moderately increase again next week.

On the other hand, the oil imports to the U.S inched up by 0.1% last week. The weekly shifts in oil imports have a mid-strong negative relation (0.33) that suggests oil prices will moderately decline next week.

The next weekly update will come out on Wednesday, March 20th and will refer to the week ending on March 8th.

OPEC’s Oil Production Remained Unchanged

OPEC’s oil production slightly rose to 30,311 thousand bbl/d in February compared with 30,237 thousand bbl/d in January. This means the total OPEC oil supply inched up by 74.4 thousand during last month. Saudi Arabia’s oil production rose by 40.7 thousand bbl/d to 9,116 thousand bbl/d. Iraq’s oil production also slightly rose by 57.8 thousand bbl/d to reach 3,062 thousand bbl/d. The current production of Libya is still nearly 5% below its average oil production of 1,600 thousand bbl/d back in 2010. Nigeria’s oil production slightly fell to 2,035 thousand bbl/d. Iran’s oil production remained stable at 2,707 thousand, which is around 13% below the average production levels in 2012 and 25% below the production in 2011.

IEA Monthly Update

Based on the latest monthly update, the global oil supply inched up in February. In February 2013, the non-OPEC output slipped. The global demand was revised down to grow by 0.9% during the year.

These figures suggest the supply is contacting while the demand for oil is rising at a slower than expected rate. On the other hand, the global refinery runs fell on account of maintenance breaks in U.S and slow pace in Europe. This news might be among the factors for the rise in oil prices.

Main Oil Related News Items for the upcoming week

Wednesday – FOMC Meeting: The FOMC will convene for the second time this year and announce at the end of two day of session of any updates to its monetary policy and interest rate. In the last FOMC meeting, which was held back at the end of January, the Fed didn’t announce of any changes. Bernanke remains dovish and has the majority in the board. The likely scenario is that the Fed will keep its policy unchanged;

Wednesday – China flash Manufacturing PMI: as of the latest the HSBC Manufacturing PMI survey regarding February 2013 the Manufacturing PMI declined to 50.4; this index indicates the developments in China’s manufacturing sectors growth rate; if the index will continue to fall, this may adversely affect oil rates;

Thursday – Philly Fed Manufacturing Index: In the latest February survey, the growth rate declined again from -5.8 in January to -12.5 in February. If the index will continue to decline it may adversely affect not only energy markets (the previous Philly Fed review);

Foreign Exchange and Oil Prices Correlations – March

During last week, the EURO/USD rose by 0.55%. Moreover, the AUD/USD also increased by 1.7% during last week. The correlations among these currencies pairs (Euro/USD) and oil prices remained strong and robust. E.g. the linear correlation between the rate of oil and EURO /USD was 0.57 during February-March. If the U.S dollar will continue to weaken against the “risk currencies”, this may pull up oil prices.

Oil Prices Outlook and Analysis

Following the rally in the price of oil last week, oil prices might continue to slowly rise. From the supply side, the little movement in oil imports to the U.S is keeping oil prices high. OPEC left its production unchanged but the output of non- OPEC countries slightly declined. The slowdown in the refineries is also keeping oil prices rising. From the demand side, the growth in the U.S and Chinese economies may contribute to the expected rise in growth in demand for oil. The upcoming reports regarding the U.S and oil might shed some light on the expected developments from demand side. The gap between Brent and WTI oil ranged between $15 and $18 and might continue to slowly fall in the coming days as the US economy is progressing (WTI oil) while the EU economy (Brent oil) is contracting. Oil stockpiles fell again last week, which could pressure up oil prices in the U.S this week. Finally, if major currencies such as the EURO will continue to rise against the U.S. dollar, they may also help rally of oil prices.The bottom line, I guess the prices of oil will slightly increase on a weekly scale.

My guess is that WTI oil will range between $92 and $96 and Brent between $109 and $113 during the week.